Scholarship/Stipend received EXEMPT u/s10(16): Dr. Rahul Tugnait v.ITO

CASE LAW DETAILS

Decided by: ITAT, CHANDIGARH BENCH `SME-B’, In The case of: Dr. Rahul Tugnait v.ITO, appeal No. :ITA NO. 197/CHD/2008, Decided on: JUNE 30, 2008

RELEVENT PARAGRAPH

5. Even if this appeal is viewed with angle of section 15 of the Act, which speaks about chargeability of salary. Section 15 of the Act is reproduced- herewith:-

“The following income shall be chargeable to income tax under the head “Salaries”-

a). any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;

b). any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer through not due or before it became due to him;

c). any arrears of salary paid or allowed to him in T7Te previous year by or on behalf of an employer or a former employer, if not charged to income tax for any earlier previous year.

[Explanation 1} For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when thesalary becomes due.

[Explanation 2] Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as “salary” for the purposes of this section.

For getting salary normally there must be employee – employer or master – servant/agent relationship. The distinction between a servant or as agent can be summarized as under:-

i. Generally a master can tell his servant what to do and how to do and how to do it.

ii. Generally a principle cannot tell his agent how to carry out his instructions;

iii. A servant is under more complete control than an agent;

i. Generally a master can tell his servant what to do and how to do and how to do it.

ii. Generally a principle cannot tell his agent how to carry out his instructions.

iii. A servant is under more complete control than an agent;

iv. Generally, a servant is a person who not only receives instructions from his master but is subject to his master’s right is control instructions but is generally free to carry out those instructions according to his own direction.

v. Generally a servant qua servant has no authority to make contracts on behalf contracts on behalf of his principal.

vi. Generally an agent is paid commission upon effecting the result which he has been instructed by his principal to achieve.

vii. Generally a servant is paid wages or salary.

For ascertaining whether a person is a servant or an agent, a rough and ready test is whether under the terms of his employment the employer exercises a supervisory control in respect of the work entrusted to the person. Aservant acts under the direct control/supervisory control or supervision of the principal, though he is bound to exercise his authority in accordance with all lawful orders and instructions which may be given to him form time to time by his principal/controller/supervisor. But this test is not universal in its application and does not determine in every case, having regard to the nature of employment, that he is aservant. A person who is engaged to manage a business may be a servant or an agent according to the nature of his service and the authority of his employment. Generally if may be possible to say that the greater the amount of direct control over the person employed, the stronger is the conclusion the possibility of the services rendered being in the nature of principal and agent. It is not possible to lay down any precise rule to distinguish one kind of employment from the other. The nature of the particular business and the nature of the duties of the employee will require to be considered in each case in order to arrive at a conclusion as to whether the person employed is aservant or an agent. In each case the principle for ascertaining remains the same.

Section 16 of the Act speaks about deduction from salaries whereas section 17 speaks about “salary”, “perquisite” and “profits in lieu of salary” etc. A conjoint reading of section, 15, 16 and 17 nowhere includes scholarship/ stipend which have been mentioned in section 10(16) of the Act. Therefore, it can be said that the stipend/scholarship has been specifically precluded from the mischief of sub clause (1) & (2) of section 17 of the Act.

If the aforesaid sections are analyzed by keeping them in juxtaposition, with the terms and conditions used in the bond, it can be said that it is neither asalary /wages nor perquisite. Even the Hon’ble Calcutta High Court in the case of CIT v. Jnan Parkesh Ghosh [62 Taxman 151 (Cal)] went to the extent that the professionals rendering the incidental services are not servants. Our above view is further forttfied by the following decision:-

i. Lakshimnarayana Ram Gopal & Son Ltd vs. State [25 ITR 449 (SC)]

ii. Ramprasad v. CIT [86 ITR 122 (SC)].

iii. Piyare Lal Adishwar Lal v. CIT [40 ITR 70 (SC)]

Therefore, unless and until a master servant relation is brought on record by the revenue, suggesting that the assessee is an employee of the college, the stand of the revenue cannot remain on its legs.

We are also tempting to reproduce some of the relevant portion with regard to section 10(16) from the commentary of Acharya Shuklendra:

“Scholarships granted to meet the cost of education [cl.(16)] – Clause (16) exempts the /scholarships granted to meet the cost of education. Where the assesses receives a trainee stipend from a U.S. Hospital to aim him in his pursuit of study and research and not for Hospital to aid him in his pursuit of study and research and not for services rendered and the services, if any are only incidental to the course of practical training, such a stipend would be ascholarship and would be exempt under cI.(16). In fact, this clause recognizes statutorily the departmental instructions issued in this behalf under the 1922 Act.

(i) Concept of scholarship and extent of exemption – By scholarship as ordinarily understood, we mean anything which makes education free of charge, or at a confessional rate of fees. In section 10(16) however, scholarship is not used in that sense of something in educational opportunity which is given free. The basic postulate of a scholarship in cIause (1.6) is that it is an income receipt. Nevertheless, it is excluded from the total income by being brought under section 10. The view of the Income tax statute of a “Scholarship” , therefore, differs from the popular of dictionary view of a “Scholarship” . Whereas under the popular view, scholarship is education made available gratis, the sense in which the same expression is used in the Income tax Act is positive payment made to a scholar for pursuit of his education. The considerations which make up the concept of a “Scholarship for meeting the cost of education” in s. 10(16} are that the payment is intended to be an income receipt in the hands of the scholar and that whatever is paid is intended to meet the cost of education of the recipient. Since the purpose of the payment is to meet the cost of education, the question whether the quantum of payment is adequate or inadequate, or, is or is not in excess of the requirements are all beside the point. It is enough if the whole object of the payment is to meet the cost of education of a person and no further enquiry is called for in order toe exclude the amount form the taxable income u/s 10(16). If the payment is only for the cost of education the fact that the recipient does not spend the whole of the amount or saves something out of it or utilizes it for other purposes would not detract from the character of the payment being one forscholarship . Circulars issued by the Central Board have also proceeded on a liberal understanding of the provisions of s. 10(16). Accordingly, where a professor of mathematics is granted a grant-in-aid by a foreign university for doing advanced research in the filed of mathematics, the amount of granl-in aid would bescholarship under cl(16), and exempt even if a part or it had been utilized for the purposes of maintaining wife and children. The discretionaryscholarship granted by the employer to the children of employees cannot be treated as a perquisile in the hands of children of employees because no right is created in their favour. Even if such scholarship is regarded as a perquisite, it would be exempt under clause (16) in the hands of the recipient. However, an amount paid to the assessee in the for services as an intern in a medical hospital, where service as an intern is necessary for a person who joins a medical school, cannot be regarded as ascholarship so as to qualify for exemption under this clause”.

(ii) Instances of scholarships: – The following are the instances of scholarships exempt under clause (16) as recognized by the department.

[1] Annual allowance granted to retiring research scientists by CSIR, New Delhi

[2] Stipend of research fellowships for working under the National Commission for the compilation of History of Scientists in India under the auspices of National Institute of Scientists of India

[3] Fulbright grants described as ‘maintenance allowance’ given to Fulbright students.

[4] Fulbright grant described as `maintenance allowance “given to American tutors prosecuting studies in India.

[5] Junior/Senior fellowships awarded by the Department of Atomic Energy.

[6] Financial assistance to teachers in the universities for undertaking research of learned work in science subjects and humanities.

[7] Maintenance allowance granted to foreign trainees under the scheme of the International Association for the exchange of students for Technical Experience.

[8] Research fellowship in engineering, technology, humanities and science subject

[9] Junior and Senior research fellowships awarded by CSIR.

[10] National research fellowship and fellowships to German nationals awarded by the Ministry of Education.

Viewed from aforesaid different angles and facts of the present appeal. It can be said that the scholarship/ stipend received by a student from College/Govt for pursuing higher studies, cannot be termed as salary. Therefore, this appeal of the assessee is allowed.

I want to make it clear that i have received a copy of the recent Judgement from Taxman and I am just reproducing the same AO not permissible to place himself in the position of the management of the assessee to decide about reasonable expenditure for a particular business purpouse

Business Expenditure : An obligation incurred, while entering into a commercial contract, has to be taken as a business expenditure within the meaning of section 37(1) unless it is shown that the contract itself was a sham document and was made with an ulterior motive.

                  

• It is not permissible for the Assessing Officer to place himself in the position of the management of the assessee and take it upon himself to decide how much would be a reasonable expenditure for a particular business purpose.

HIGH COURT OF DELHI

CIT

v.

Micromatic Machine Tools P.Ltd.

ITA 587/2010

May 19, 2010

FACTS

 

While dismissing the appeal filed by the Revenue, it was noted by the Tribunal that nothing had been brought on record, by the Assessing Officer, to suggest that the expenditure was not incurred for the business purpose of the assessee. In the opinion of the Tribunal, if somebody, other than the assessee, benefited from the expenditure incurred by it, that would not be a relevant factor if the expenditure was incurred wholly and exclusively for the business of the assessee.

HELD

 

Section 37(1) of the Income Tax Act, to the extent it is relevant, provides that any expenditure, not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly or exclusively for the purpose of the business or profession would be allowed in computing the income chargeable under the head “Profit and Gains of the Business or Profession.”

In the case before us, there is no dispute that the assessee company had actually incurred the expenses claimed by it for participating in the exhibition. The only question, which the Assessing Officer could examine, was whether the expenditure had been incurred solely for the purpose of business of the assessee-company or not. Admittedly, the assessee-company was the sole Selling and Servicing Agent for the products being manufactured by its Principals. The assessee-company was also engaged in selling the spare parts of the machinery being manufactured by its Principals. As noted by both, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, the agreement, between the assessee company and its Principals, obliged the assessee-company to contribute 50% of the expenditure incurred on participation in the exhibition, though during the year in question, the assessee-company contributed only 31.6% of that expenditure, the balance having been contributed by its Principals. Therefore, the assessee-company was under a contractual obligation to contribute half of the expenses incurred on participation in the exhibition. It would be difficult to say that the expenses incurred in performance of the contractual obligation of the assessee-company would not be expenditure for the business of the assessee-company. An obligation incurred, while entering into a commercial contract, has to be taken as a business expenditure within the meaning of Section 37 (1) of the Act unless it is shown that the contract itself was a sham document and was made with an ulterior motive. What is required to be established is a nexus between the expenditure incurred and the business purpose of the assessee. It is not permissible for the Assessing Officer to place himself in the position of the management of the assessee and take it upon himself to decide how much would be a reasonable expenditure for a particular business purpose. The matter has to be seen purely from the viewpoint of the management of the assessee, taking its commercial interests into consideration.

JUDGMENT

V.K. JAIN, J. (ORAL)

1. This is an appeal impugning the order dated 30.01.2009, passed by the Income Tax Appellate Tribunal, whereby it dismissed the appeal filed by the Revenue, being ITA No.1253/Del/2007, against the order passed by the Commissioner of Income Tax (Appeals), allowing the appeal filed by the assessee, against the assessment order for the Assessment Year 1998-99.

                         

2. The assessee-company is engaged in the business of marketing machine tools for certain manufacturers. During the year in question, the assessee incurred expenses, amounting to Rs 20.42 lakhs for participating in the exhibition IMTEX-1998. The vouchers in respect of the aforesaid expenditure were produced before the Assessing Officer, who noticed that the expenditure incurred on the exhibition during the Assessment Year 1997-98 being only Rs 2,67,162/- there was an eight fold increase in the expenditure, though the commission income earned from the sale had decreased to Rs 2.15 crore in the Assessment Year 1998-99, as against Rs 2.43 crores earned in the Assessment Year 1997-98. The Assessing Officer, therefore, added back Rs. 18 lakhs out of the aforesaid expenditure, to the income of the assessee company. In the appeal filed by the assessee, the Commissioner of Income Tax (Appeals) confirmed the disallowance only to the extent of Rs 9 lakhs.

3. Cross appeals against the order of the Commissioner of Income Tax (Appeals) were filed by the Revenue and the assessee. The Tribunal restored the issue back to the CIT (Appeals), taking the view that the basic question, which needed to be addressed, was whether the expenditures were wholly for the business purposes or not. It was held that if the expenses were found to be incurred exclusively and wholly for the business of the assessee, it would be irrelevant that they have increased eight times.

4. During the course of hearing before the Commissioner of Income Tax (Appeals), after the matter had been remanded by the Tribunal, it was submitted on behalf of the assessee that as per the agreement of the assessee-company with its Principals, whose products were being marketed and serviced by it, the assessee-company had incurred expenditure on technical exhibition, to promote the products of the Principal Companies and part of the expenditure was to be borne by the assessee-company. It was pointed out that the assessee company had borne only 31.6% of the expenses incurred on the exhibition and there was increase in the sale of the products, on account of sale promotion activities such as participation in the exhibitions. The eight fold increase in the expenses was attributed to the exhibition being held every three years. It was pointed out that in the past also, there was increase in the expenditure during Assessment Years 1992-93 and 1995-96, when exhibitions were held.

5. It was noted by the Commissioner of Income Tax (Appeals) that as per the agreement between the assessee and its Principals, the assessee was required to meet 50% of the expenditure incurred on exhibition, whereas it had contributed only 31.6% of the same, the balance having been contributed by the Principals. It was also noted that the IMTEX exhibition was held every three years and there was steep increase in the exhibition expenditure. He was of the view that since there was a direct co-relation between the commission earned by the assessee and the sale of the products of the Principals, any expenditure for the purpose of increasing sale would be a valid business expenditure in the hands of the assessee.

6. While dismissing the appeal filed by the Revenue, it was noted by the Tribunal that nothing had been brought on record, by the Assessing Officer, to suggest that the expenditure was not incurred for the business purpose of the assessee. In the opinion of the Tribunal, if somebody, other than the assessee, benefited from the expenditure incurred by it, that would not be a relevant factor if the expenditure was incurred wholly and exclusively for the business of the assessee.

                         

7. Section 37(1) of the Income Tax Act, to the extent it is relevant, provides that any expenditure, not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly or exclusively for the purpose of the business or profession would be allowed in computing the income chargeable under the head “Profit and Gains of the Business or Profession.”

8. In the case before us, there is no dispute that the assessee company had actually incurred the expenses claimed by it for participating in the exhibition. The only question, which the Assessing Officer could examine, was whether the expenditure had been incurred solely for the purpose of business of the assessee-company or not. Admittedly, the assessee-company was the sole Selling and Servicing Agent for the products being manufactured by its Principals. The assessee-company was also engaged in selling the spare parts of the machinery being manufactured by its Principals. As noted by both, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, the agreement, between the assessee company and its Principals, obliged the assessee-company to contribute 50% of the expenditure incurred on participation in the exhibition, though during the year in question, the assessee-company contributed only 31.6% of that expenditure, the balance having been contributed by its Principals. Therefore, the assessee-company was under a contractual obligation to contribute half of the expenses incurred on participation in the exhibition. It would be difficult to say that the expenses incurred in performance of the contractual obligation of the assessee-company would not be expenditure for the business of the assessee-company. An obligation incurred, while entering into a commercial contract, has to be taken as a business expenditure within the meaning of Section 37 (1) of the Act unless it is shown that the contract itself was a sham document and was made with an ulterior motive. What is required to be established is a nexus between the expenditure incurred and the business purpose of the assessee. It is not permissible for the Assessing Officer to place himself in the position of the management of the assessee and take it upon himself to decide how much would be a reasonable expenditure for a particular business purpose. The matter has to be seen purely from the viewpoint of the management of the assessee, taking its commercial interests into consideration.

9. In the case before us, the genuineness of the contract between the assessee-company and its Principals for sharing the expenditure incurred on participation has not been disputed by the Assessing Officer. In any case, since the assessee-company was the sole agency appointed for marketing and servicing, etc. of the machines manufactured by its Principals, participation in the exhibition was likely to be beneficial to the assessee-company, since increase in the sale of the product on account of promotional activities undertaken during the exhibition is to result in proportionate increase in the commission, being paid to the assessee company, by its Principals. So long as the participation in the exhibition ensued to the benefit of the assessee-company in the form of increased commission on the products sold and serviced by it, it would be immaterial that part of the benefit on account of promotional activities undertaken during the exhibition would also accrue to the manufacturers of the machines being sold and serviced by the assessee-company. In any case, in the case before us, the Principals of the assessee company have contributed more than 68% of the expenditure incurred on participation in the exhibition.

                         

10. In CIT vs. Chandulal Keshavlal & Co.: 38 ITR 601, the assessee, which was the Managing Agent, getting commission under an agreement with the managed company, had waived aportion of the commission payable to it. Upholding the partwaiver of the commission, it was held by the SupremeCourt that if the payment or the expenditure is incurred for the purpose of the trade of the assessee, it does not matter that the payment may inure to the benefit of a third party. The Court was of the view that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order indirectly to facilitate the carrying on of the business may yet be expended wholly and exclusively for the purpose of the trade.

11. In Sassoon J. David and Co. Pvt. Ltd., vs. CIT, Bombay: 118 ITR 261, the Supreme Court observed that ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of its business and that such expenditure may be incurred voluntarily and without any necessity. The Court was of the view that if the expenditure is incurred for promoting the business and to earn profits, the assessee can claim deduction even though there was no compelling necessity to incur such expenditure. Relying upon its decision in the case of Chandulal Keshavlal & Co. (supra), it was held that the fact that somebody, other than the assessee, also benefited by the expenditure should not come in the way the expenditure being allowed by way of a deduction. The case of the assessee before us stands on a stronger footing since, besides the expenditure being in the business interest of the assessee-company, it was also a contractual obligation incurred by it under the agreement it had with its Principals

12. For the reasons given in the preceding paragraphs, we find no reason to interfere with the view taken by the Income Tax Appellate Tribunal. No substantial question of law arises for our consideration.

The appeal is accordingly dismissed.

Recent Judgement:Real Estate Developer - Sale of land held as stock-in-trade to be treated as business income and not capital gains

Income tax - real estate developer - sale of land held as stock-in-trade to be treated as business income and not capital gains: ITAT

MUMBAI, MAY 18, 2010: IN case of land transactions there appears to be a trend to escape from paying tax by forming a partnership firm. In this case also, the issue is whether the partnership firm constituted by the assessee with four other persons was constituted only for the purpose of tax evasion, and whether once it is held that firm was bogus then the profits accrued on transfer of land held as stock in trade is to be assessed as "business profits".

Facts fo the case

Assessee, a builder, acquires rights over one plot located at Ghat-Koper. He enters into partnershipv(PF) with four other persons on 17.04.2003 and retires from the firm after 7 days after receiving his share of profit and development expenses. AO takes the view that the creation of PF was a camouflage and the real purpose was tax evasion. Before the CIT(A) the assessee argues that whatever has been received by the assessee on retirement is taxable as capital gain but the taxable event will arise only when he sold the properties received by him on retirement.

Revenue filed appeal before the ITAT which has held that,

++ The device of constituting partnership firm with the assessee as one of its partners and then his retirement after 11 days on the basis of retirement deed, the stamp papers for which were purchased simultaneously with the formation of the partnership firm, do go to show that the assessee was not genuinely inducted in and then removed from the firm as partner in the said firm. On the other hand the reality of the transaction which can be viewed by the naked eyes is that the assessee agreed to sell development right in Ghatkopar plot to the four persons.

++ In order to extinguish or defer the genuine tax liability on account of such transaction of sale, a circuitous route was adopted by which the assessee was to first join the partnership firm and then retire from it within few days leaving the development right in Ghatkopar plot with the firm for the agreed consideration. We, therefore, hold that the assessee was neither genuinely inducted in nor actually retired as partner from the firm;

++ It is trite that any profit or gain on the transfer of stock in trade is regarded as business income and there is no question of assessing any part of it under the head `Capital gains'.

++ Under such circumstances and further considering the fact that the assessee himself showed income of Rs 30,61,451 as assessable under the head `Profits and gains of business or profession', the entire income from this transaction is to be regarded as "business income" and no part of it can be taxed under the head `Capital gains'.

Revenue's appeal partly allowed.

(In the case of DLF Universal Limited (2010-TIOL-16-ITAT-DEL-SB) it was held that partnership firm was bogus and the profits on transfer of land bank were held to be capital gains and not business profits - Editor's Note)